Media Worth Consuming – December 2019

Jonathan Rochford

Narrow Road Capital

Investor sentiment is very bullish, should we be fearful? One-third of S&P 500 companies have seen their year on year earnings decline. Vanilla equity indices are arguably overweight technology and growth stocks, skews historically associated with lower future returns. Three theories on why companies with negative equity have performed so well. Companies are increasingly using financial footnotes to bury bad outcomes. Ten European countries are looking to introduce a 0.2% transaction tax on large capitalisation share trades.

American auto lenders are verifying the applicant’s income on only 5% of loan applications, leaving the system riddled with fraudulent applications. Adjustments make up 24% of EBITDA for mid-market leveraged loans, with the 2019 vintage 29% more leveraged than 2007. The sum of outstanding leveraged loans is bigger than subprime mortgages were pre-crisis. Arguments and data that point to leveraged loans and CLOs being high risk. The bond issues that burned buyers the most in the last decade. Low recovery rates on bankrupt US colleges are pushing lenders to restructure debt to the sector earlier. Rating agencies are reaching very different conclusions on the default risk of municipal bonds. A Danish utility issued a 1,000 year hybrid security.

Argentines are rushing to restructure their financial arrangements as the new government introduces wealth taxes. Lawyers expect Argentina’s debt restructuring to be long and complicated. Buenos Aires province has flagged it will also need a debt restructuring. How Lebanon got itself into a deep financial hole. The thirty year history of Iraq’s debt run up and default. Greece’s reform minded Prime Minister is heading in the right direction but has many economic mountains to climb. Twenty African nations have debt at or near distressed levels. The World Bank: emerging markets (notably China) have gone on an epic debt binge; precedents point to a major hangover ahead.

Chinese industrial profits have fallen at their fastest rate in seven years. A Chinese conglomerate ranked 132 on the Fortune 500 list has defaulted on some of its bonds, with a 64% haircut proposed for its offshore bonds. Bondholders of China’s $38 billion Tewoo Group have accepted haircuts of 33-63%, holdouts are expected to take greater losses. Two bond defaults in a day shows China’s leveraged companies are running out of options.

Two distressed debt funds have gated after a poor year for the sector. Bridgewater has returned only 3.8% per annum over the last 8 years on its flagship fund but still has a $5 billion waiting list. Private equity returns get progressively worse as managers raise larger funds. Too much money chasing too few assets is bad news for prospective private equity returns. Strategic partnerships in funds management haven’t delivered on their promises, except for lower fees. Beware of fund managers selling funds based on back testing that beats anything ever delivered in real life. There are many unknowns on the risks of the Mayfair 101/IPO Wealth business model.

Failing Russian banks have been a honeypot for corrupt officials. A Chinese bank CEO has been given a death sentence for stealing $100 million from his now bailed-out bank. The Vatican is using donations made for poverty relief to cover its operating budget deficit. A French Court ordered BNP Paribas to pay $1.4 million to a trader sacked after he lost the bank $19 million. A 27 year old trader at Morgan Stanley lost $140 million on Turkish Lira bets. The tricks that banks use to look safer than they are.

To pay a wealth tax, many investors need to sell assets and crystallise capital gains, making for a double tax hit. In life and investing, not being stupid often wins. Interesting finance charts summing up the last decade. How a bank for the poor made its shareholders rich by offering customers a good deal and old fashioned customer service. The story of the bank that does the grunt work for fintech lenders.

Peloton shares dropped 10% after some called its Christmas advertisement sexist. Softbank’s markdown of WeWork might be just the start as its unusual investment and valuation approach comes under scrutiny. Some ESG funds are loading up on debt from Saudi Arabia, a major human rights violator. ESG concerns are creating bargain buying opportunities.

Politics & Culture

Obama’s FBI faked evidence and lied to a court to get approval to investigate Trump’s campaign. The Democratic National Committee is breaking its own rules to block Tulsi Gabbard from being part of the next Presidential candidate debate. Neither side of American politics cares that that the US is the largest money laundering hub in the world.

Property taxes and the high cost of living have 28% of New Jersey residents planning to leave in the next five years. States use lotteries to raise revenues, but cause substantial social harm as a result. Opening supermarkets in food deserts makes little difference to the food that low income people buy. A Wisconsin city bans throwing snowballs on public property. An Iowa man was sentenced to sixteen years jail for burning a gay flag. European rescues of migrants coming by sea has resulted in people smugglers taking greater risks. Sam Cooke used free markets to overcome racism.

A foreign prisoner in China has used a Christmas card sold at Tesco to call for help. China pulled an Arsenal match off TV after one of its players criticised the country’s treatment of the Uighur minority. China responds with empty sanctions to America’s support for Hong Kong. The Chinese Ambassador to Denmark threatened to kill off a trade deal between the Faroe Islands and China if the Islands didn’t install a Huawei 5G network. A Chinese talent agency severed its relationship with a Taiwanese social media star after he referred to Taiwan’s President as “President”. Chinese netizens have ripped into Huawei’s CFO for seeking sympathy after the company had a former employee jailed for eight months for daring to ask for severance pay. Chinese universities are replacing statements on academic freedom with pledges to support the communist party.

A Sydney academic is facing court for allegedly faking harassment after her university cancelled her course. Academics found that adding women to boards doesn’t increase company profitability, but it does have a slight negative impact on a company’s share price. Bloomberg was fined €5 million for reporting fake news and crashing a company’s share price.

Economics & Work

A Fed Governor has recommended taking Japan style control of the interest rate curve if the economy worsens. Japanification is now a global problem. After five years of negative interest rates pushed Swedish private debt levels to amongst the highest in the world, the country’s central bank has lifted the overnight rate back to zero. After wars and hyperinflation, saving is ingrained in German culture and negative interest rates haven’t changed that. Economists at the Federal Reserve have a written a paper describing how printing money leads to hyperinflation, but claim that this doesn’t apply to the US. The Federal Reserve is right to call out excessive risk taking but wrong to keep adding to it by cutting interest rates. Central banks should leave environmental policy to politicians and governments.

When Americans say they like socialism, they usually mean transferism and when they dislike capitalism, they usually mean cronyism. The Pilgrims tried socialism and starved, they switched to capitalism and thrived. More free stuff from government will never be enough to lift people out of poverty. There’s isn’t really a choice between outright capitalism and outright socialism, it’s a spectrum.

Dave Chappelle dishes out a lesson on export economics. Twelve basic principles of economics everyone should know. The economics profession spends too much time on market failure and not enough time on government failure. The money multiplier theory for banks doesn’t hold up in the real world. Five ways economists can ruin the spirit of Christmas.


Australian scientists have found a much cheaper way to create hydrogen from water, using iron and nickel. The next generation of nuclear power generators could be 1% of the size of the old reactors. Tech companies have wildly succeeded in cloud computing and selling ads, but have had limited success in the physical world.

For commonly used health services, the US is far more expensive than almost every other developed country. The ADHD epidemic is a schooling problem not a child problem. Samoa’s measles epidemic has been blamed on low vaccination rates and a botched vaccine.

That’s not just a banana taped to a wall, it’s a piece of art that sold for $120,000. A “random” man walked up and ate the said banana mostly likely for either marketing purposes or as performance art. The exhibit was then vandalised with “Epstein didn’t kill himself”. Homes designed by star architects often sell for far less than they cost to build.

A team of three took a mere 27.5 hours to drive from New York to Los Angeles. AirAsia has opened a restaurant on the ground, selling versions of its airplane food. Thieves stole $1 billion in jewels from an uninsured German museum. Five tips on negotiating from an FBI hostage negotiator. The Apostrophe Society is shutting down as almost nobody cares about the correct use. How the McKinsey-fied Houston Astros cheated their way to a championship. Big Dog’s ultramarathon has no finish line, you win when no one else can run anymore.

Jonathan Rochford
Portfolio Manager
Narrow Road Capital

Narrow Road Capital is a credit manager with a track record of higher returns and lower fees on Australian credit investments. Clients include institutions, not for profits and family offices.

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